Life Settlement Value Profiles across Different Death Rate Distributions

Abstract

The life settlement asset class is a recognized part of the alternative investment market. Our article offers insight into the behavior of portfolios of life settlement contracts. We focus on the value profiles of pools of life settlement contracts in the value/cost of capital space. A pool of life settlement contracts has a death rate distribution that will determine the amount of premiums that must be paid each period and the amount of death benefits that will be collected each period. Because value is determined by the timing, magnitude, and certainty of the cash flows generated by an asset, it is inexorably linked to the timing of the life settlers’ deaths. We show that when certain conditions are met, pools with fundamentally different underlying mortality rates and risk profiles, but with the same cost of capital, can have the same value (pivot point in the value/cost of capital space). This pivot point can be useful for fund managers seeking to modify a portfolio of life settlements under a specific cost-of-capital constraint.

TOPICS: Wealth management, statistical methods, portfolio construction